Bonds Rally as India’s Monetary Policy Panel Cuts Rate at Debut

Updated on
  • Yield on notes due 2026 plunges five basis points to 6.72%
  • Scope for another rate cut to help ease yields: Edelweiss

India Lowers Rates in Patel's First Policy Decision

India’s 10-year bonds rallied after a monetary policy panel cut the benchmark interest rate to its lowest level in more than five years.

A six-member committee comprising Reserve Bank of India officials including Governor Urjit Patel and three academics unanimously decided to cut the repurchase rate to 6.25 percent from 6.50 percent in the nation’s first-ever collective rate decision on Tuesday. Policy makers said risks to inflation were “tilted to the upside.”

“It is a pro-growth dovish policy,” said Bhupesh Bameta, head of research for currencies and rates at Edelweiss Financial Services Ltd. in Mumbai. “The RBI’s faith in government has increased and it has led them to cut interest rates despite flagging risks to inflation.”

The yield on notes due September 2026 plunged five basis points to 6.72 percent in Mumbai, prices from the central bank’s trading system show. That’s the lowest close for a benchmark 10-year security since June 2009. Edelweiss expects the yield to fall further, with room for another 25-basis point rate cut by March 31.

The monetary policy committee envisages inflation on a path to meet the RBI’s target of 5 percent by March 2017, and while risks are to the upside, they are not as high as flagged in June and August, according to a statement. Consumer-price gains slowed to a five-month low of 5.05 percent in August as good monsoon rains pushed down food costs.

Rupee Gains

Tuesday’s easing was predicted by 16 of 39 economists surveyed by Bloomberg. Twenty-two saw no change, while one expected a cut to 6 percent.

The rupee advanced 0.2 percent at 66.46 a dollar, according to prices from local banks compiled by Bloomberg. It rose as high as 66.3950, the strongest in almost a month, immediately after the decision.

“The policy sets rates in line with emerging low-inflation realities,” said Sandeep Bagla, Mumbai-based associate director at Trust Capital Services India Pvt. “It provides an impetus to growth, which is much needed for the Indian economy. RBI now has to ensure more liquidity in the system to ensure smooth and proper transmission.”